AVITA Medical, Inc. (RCEL) Earnings Call Transcript & Summary

Good day, and thank you for standing by, and welcome to AVITA Medical Third Quarter 2022 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jim Corbett, CEO. Please go ahead.

Thank you, operator. Welcome to AVITA Medical's Third Quarter 2022 Earnings Call. Joining me on today's call are Jim Corbett, Chief Executive Officer; and Michael Holder, Chief Financial Officer. This call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements, including statements regarding the markets in which AVITA Medical operates, trends, demand and expectations for its products and technology, its expected financial performance, expenses and position in the market and the impact of COVID-19 on its operations and its customers' operations. These statements are neither promises nor guarantees and involve known and unknown risks and uncertainties that could cause actual results, performance or achievements to differ materially from any results, performance or achievements expressed or implied by the forward-looking statements. Please review AVITA Medical's most recent filings with the SEC, particularly the risk factors described in AVITA Medical's S3 and 10-K filings and in AVITA Medical's quarterly report on Form 10-Q for the third quarter ended September 30, 2022, for additional information. Any forward-looking statements provided during this call, including projections for future performance, are based on management's expectations as of today. AVITA Medical undertakes no obligation to update these statements, except as required by applicable laws. AVITA Medical's press release of third quarter 2022 results is available on its website www.avitamedical.com under the Investors section and includes additional details about its financial results. AVITA Medical's website also has the latest SEC filings, which you are encouraged to review. A recording of today's call will be available on AVITA Medical's website by 5:00 p.m. Pacific Time today. Now it's my pleasure to introduce you to Jim Corbett. Jim is a 5-time life sciences CEO with over 30 years of experience leading global commercial stage companies. His deep expertise spans across many medical specialties and technologies with vast technical experience in the medical device industry. Additionally, Jim brings extensive experience across the capital markets, having served in both public and private companies. With that, I would like to turn the call over to Jim for his comments on third quarter 2022 business highlights.

Thank you, Caroline. Good afternoon, everyone, and thank you for joining us today. Before I express how excited I am to be here, I want to take a moment to thank and recognize Dr. Mike Perry. Mike Perry served as CEO for the past 5 years, and we're grateful to him for his important contributions during his tenure. I'm often asked what about AVITA attracting me to come and join the team? As an AVITA Board member for the past 5 quarters, I've become very familiar with the business and its challenges and opportunities. What I saw was a transformative technology that has already brought hope to thousands of patients and an opportunity to work with a great team to bring this technology to thousands more. To illustrate that, I'd like to share with you a recent patient journey, which has inspired me and the team at AVITA. Charlie Anne Xavier was working on a project at her family's brewery in Virginia when a life-changing accident engulfed her in flames, causing third-degree burns to over 85% of her body. At the VCU Evans-Haynes Burn Center in Richmond, she was given a slim chance of survival with the expectation of a 12-month stay in the ICU. Instead, Charlie Anne left the hospital 9 days shy of 6 months to which her husband credits RECELL as a significant part of her successful recovery. Charlie Anne and her adoring husband, Andre, are now focused on giving back by providing hope to anyone suffering from a traumatic burn injury. Thank you, Charlie Anne and Andre for sharing your story of tragedy and triumph. This is the kind of life-changing impact RECELL continues to provide other patients and one of the main reasons I'm thrilled to have the opportunity to join AVITA. This story and others we have relayed truly demonstrates the importance of our burn work. Now I'd like to take a moment and discuss the initial priorities that I have been focusing on during my first 100 days as CEO. First, developing the commercial plans for burns and soft tissue repair to drive our growth and preparing to execute on that plan. Secondly, the FDA submissions for soft tissue repair and Vitiligo are expected during December 2022, with approvals expected in June 2023. Just last week, the FDA informed us that the RECELL system has been granted the breakthrough device designation for both the soft tissue repair submission and the vitiligo submission. The breakthrough devices program facilitates active interaction with the FDA and prioritizes the review of subsequent regulatory submissions, including our submissions expected in December. Finally, the automation of the RECELL device for the soft tissue repair and burns program, which will be followed by an automated device for vitiligo. Our growth for the next 24 to 36 months will be driven by the burns and soft tissue repair markets. The soft tissue repair market will expand our hospital call point and treating physician call points by nearly 3x. This expansion of market opportunity is the foremost commercial priority of the company. The vitiligo program will be focusing on achieving reimbursement, supporting early commercial cases and clinical development in support of those initiatives, which we believe we will accomplish by Q1 2025. Now let me discuss our Q3 results. We had a strong top line revenue performance with $9 million in commercial revenue in Q3 2022, which is a 30% increase over the same period the prior year and a 9% increase on a consecutive quarter basis. Keep in mind that commercial revenue includes all global revenue and excludes the $0.1 million in BARDA revenue booked in the quarter. I also have a Japanese market update. In early September, the Ministry of Health, Labor and Welfare, commonly known as MHLW, granted the RECELL system marketing approval for the treatment of acute burns in Japan with very favorable reimbursement of JPY970,000 for our standard device, which is approximately $7,000 converted at the current exchange rate. We, of course, share that revenue with COSMOTEC. The end customer reimbursement price is slightly higher than our current pricing in the U.S., of which AVITA receives 40% from our partner, COSMOTEC. COSMOTEC is preparing to launch RECELL and we have received an initial stocking order of $555,000 from COSMOTEC in September. At the point of note, other than U.S. revenue, we do not intend to release country-specific revenues in the future unless there's some unusual event that causes us to do so. Let me provide an update on our Ease of Use product. We started selling the Ease of Use device in Q1 to our larger accounts, which has been well received by our customers. One of the reasons customers prefer this version of RECELL is that it streamlines the workflow, mitigates the staffing shortage and reduces the training efforts that both the customer and the AVITA team need to perform. We plan to expand the availability of our Ease of Use product in the upcoming quarters. With regard to the soft tissue repair market, we're prioritizing our soft tissue repair launch, given our existing codes, the overlap with level 1 and 2 trauma centers and our existing burn center customer base. and the ability to leverage and expand our current sales force. One clear upside in prioritizing soft tissue repair is that we will have immediate reimbursement. While burns is primarily inpatient, we also have outpatient reimbursement through our transitional pass-through code with the sub tissue repair indication, we find the majority of patients in level 1 and 2 trauma centers being treated in the outpatient setting. Thus, we have been educating our burns customers on how to utilize these codes correctly. Further, approximately 50% of our current burn centers overlap into level 1 and 2 trauma centers. Thus, we gain significant leverage from the sales organization as we expand in the coming year. Earlier this year, we released the top line results for our soft tissue repair trough. The study had 2 co-primary endpoints. One endpoint had a hypothesis of superiority for donor skin sparing and the other co-primary endpoint had a hypothesis of noninferiority for healing based on pairwise comparisons where each subject received both RECELL treatment and standard of care treatment as the study control. I am pleased to report that both co-primary endpoints have been met for both donor-sparing superiority and non-inferiority healing for RECELL and soft tissue repair. In our initial analysis, the healing endpoint for RECELL versus control did not reach prespecified statistical noninferiority. However, after data and reverification and associated corrections, an updated analysis has revealed that the healing endpoint has been met. Now let's spend a few minutes on vitiligo. For those of you who might be new to AVITA, vitiligo is a chronic autoimmune disease that attacks pigment-producing cells, resulting in spots or patches of lighter or white depigmented skin. Although non-life threatening, it can occur anywhere in the body and can result in severe psychological debilitations due to perceived disfigurement. Today, vitiligo affects up to 2% of the population worldwide, including an estimated 6.5 million Americans. In September, we announced results from a pivotal clinical trial, evaluating the safety and effectiveness of the RECELL system for repigmentation of stable vitiligo lesions. We met our primary endpoint in this trial. Let me share a little bit about that endpoint. It is unique as there has never been a trial that effectively treats vitiligo with cellular transplant patient. The study compared success rates in a design where each patient randomly received RECELL treatment in one portion of the depigmented area. The study control, as a standard of care, narrowband ultraviolet B phototherapy, which is typical first-line treatment for vitiligo. Repigmentation was evaluated 6 months after treatment by an expert central review committee, CRC. The CRC reported 56% of RECELL treatments versus 12% of control treatments resulted in repigmentation of more than 50% of the treated area. The CRC also reported 36% of RECELL treatments versus 0% of control treatments resulted in repigmentation of at least 80% of the treated area, establishing super superiority for the primary endpoint. We have had an opportunity to review this data with our medical advisers. The response was enthusiastic, particularly because they have no treatment that achieves this result in 6 months. These are the first results from a U.S. randomized controlled trial of the RECELL system in treating patients with segmental and nonsegmental stable vitiligo and provide a foundation for communicating favorable clinical benefit. We intend to submit to the FDA for this indication in December of this year with approval expected in June 2023. We're tremendously excited about the pending submission and subsequent approval in June '23. Going forward, we will be working with private payers and CMS to establish reimbursement for the vitiligo RECELL treatment. Currently, we believe we can achieve this by January 2025. During the interim period, we will continue to conduct vitiligo clinical research to support the ideal patient selection and treatment regimen for the broader population of vitiligo patients. The pure scale of the market and the significant benefit to these patients will be further enhanced by our automation program, which will allow for physician office treatment with the RECELL for vitiligo. We'll keep you current with our progress on automation, clinical development and reimbursement. Finally, I'd like to take a moment to emphasize the growth drivers for 2023. First and foremost, we are focused on accelerating growth in our burns business through greater penetration in burn centers and greater adoption by burn surges and expansion of our commercial organization. Second, we are planning a full and immediate launch into the soft tissue repair market in July 2023 following the expected FDA approval in June 2023. We plan to hit the ground running at launch with an expanded field force in place as well as with commercial support resources and programs. Looking at this strategically, our growth in 2023 and 2024 will be driven by the penetration of the burn and soft tissue repair markets in the U.S., followed by the achievement of reimbursement for vitiligo for our full launch in January 2025. With that, I'd like to turn it over to Michael Holder, Chief Financial Officer.

Thank you, Jim. Our commercial revenue, which excludes BARDA revenue, increased by 30% or $2.1 million to $9 million in the 3 months ended September 30, 2022 compared to $6.9 million in the corresponding period in the prior year. Total revenue, which includes BARDA revenue, increased 30% or USD2.1 million to USD9.1 million compared to $7 million. The growth in commercial revenues was largely driven by deeper penetration within individual customer accounts, along with the commencement of commercial sales with our partner, COSMOTEC in Japan. Gross profit margin decreased by 2% to 83% compared to the corresponding period in the prior year. Total operating expenses increased by 16% or USD2 million to USD14.2 million compared to $12.3 million in the corresponding period in the prior year. The increase in operating expenses is attributable to higher compensation costs, pre-commercialization costs, research and development expenses, partially offset by lower share-based compensation expenses. Higher compensation costs were primarily a result of an expansion of our commercial team, along with an increase in commissions, which resulted from an increase in commercial revenues. In addition, we incurred severance costs in the current quarter associated with the termination of a former executive employee. Higher pre-commercialization costs were driven by activities related to future RECELL launches in soft tissue repair and vitiligo. Increased research and development expenses resulted from ongoing development of next-generation devices for more automated preparation of Spray-On Skin cells. Higher research and development expenses were partially offset by lower clinical trial expenses for soft tissue repair and vitiligo as trial participants were in less costly follow-up phases this period compared to more costly recruitment and treatment phases in the prior period. Share-based compensation expense was lower in the current period as certain performance milestones were met in the prior period. And there was a reversal in the current period of previously recognized expense for unvested awards related to the termination of an executive officer. Net loss decreased by 6% or USD0.4 million to USD5.6 million or $0.22 per share compared to a net loss of $5.9 million or $0.24 per share in the corresponding period of the prior year. Adjusted EBITDA loss increased by 2% or USD84,000 to USD4 million compared to a loss of $3.9 million in the corresponding period in the prior year. A table reconciling non-GAAP measures is included in the related press release for reference. Turning to guidance. Full year 2022 commercial revenue guidance is revised and increased to a range of USD33 million to USD34 million from $30 million, excluding BARDA revenues, which represents an approximate 33% increase year-over-year. We continue to project BARDA revenues of approximately $0.3 million in calendar year 2022. With that, we thank you for your attention. And now I will turn the call back over to the operator for your questions.

[Operator Instructions] And our first question comes from Brooks O'Neil from Lake Street Capital.

This is [ Charlie Manting ] on for Brooks O'Neil. My first question is how will the Fast Track designations change the way you guys approach the soft tissue and vitiligo?

Thanks, Charlie. This is Jim. This is my first time speaking with you. The principal contribution that the designation gives us is it pluses for essentially a very dynamic and real-time review process and a prioritization with FDA. That is the #1 benefit that we'll enjoy with both submissions of soft tissue and vitiligo. It also will help us later as we develop reimbursement for vitiligo. So those are the 2 principal benefits of that designation.

Okay. And then my next question is how does the hospital environment return to normal? And if it's not, kind of where are we and where do you think or do you see the hospital environment over this winter?

Well, overall, the hospital environments return to a place where we have good access in terms of our selling time and very good access in terms of our support of physicians and their staff in terms of training as well as supporting cases. So we actually are not heavily impacted by the hospital environment. We do see that there's some staffing shortages, which causes us to have to do a little bit more training with the staff, and it uses, of course, selling time to do that. But I wouldn't characterize it as a dominant or significant challenge for us in the current time as we see it.

And our next question comes from Matthew O'Brien from Piper Sandler.

So I just want to make sure we tease out what you're getting from Japan versus the increase in guidance here? I think you said, Jim, 555 here in Q3. Are you going to get some more from COSMOTEC in Q4 as far as a bulk order? And then I guess, just to kind of wrap up the question, if it's I don't know, $1 million, then you have a $2.5 million increase in the guide. So clearly, the fundamentals are picking up. Can you just talk about what that is in terms of share taking or sorry, sort of penetration of existing accounts versus new accounts that you're onboarding?

Thanks, Matt. Well, let me take those in order. With respect to Japan, you're right, the initial stocking order was $555,000, and we do not yet have a clear view on the pace of the launch, although there was quite a number of cases performed in the last 30 days. So we know that they're active and they're consuming that initial stocking order. We're expecting that during the next quarter, we'll get some visibility on the coming year. And when we get that, we're going to communicate that to you and the rest of the market. In terms of our core business, we didn't add very many new accounts because, of course, as you know, burns market is up somewhere 140, 150 burn centers in the United States. So our uptick in revenue is reflective of increased penetration. So we are getting increased penetration and a broader use by surgeons, and we expect that to continue. As part of our soft tissue repair initiative over the next 6 months, we will be increasing the coverage profile of our sales force, where they have time to be deeper in the accounts, which is where the action is, of course.

Got it. Okay. But just to be clear, only $500,000 of the $3.5 million increase for the year is from Japan. So the other $3 million is... the [ $3 ] million is domestic.

That's correct. 555 million, okay.

Yes. Got it. Got it. Okay. Sorry, I'm using round numbers to make it easy. And then the second one is, I don't want to get into vitiligo too much because you've got a lot of opportunity on the burn and soft tissue side, but I just want to make sure that the message is clear here. You're still very bullish on the vitiligo. I don't want to put words in your mouth, but it seems like you're still very bullish on the opportunity. But just given your resources and the opportunity for soft tissue plus burn, that's the focus now, do a lot more work to get reimbursement in place and have another growth driver of a big market in '25 and in the back half of the decade. Is that the right way to view it?

Yes, I think so. When you look at vitiligo, first of all, our results have been just received fantastically enthusiastically by our medical advisers. There is no such treatment for these patients that achieves the result that we achieved in our trial. So we're extremely bullish on it. That said, we need to get reimbursement sorted out, and that will take a little bit of time. We estimate that right now. I've had a chance really to get into that strategy, and I have a fair bit of experience in reimbursement. And that January '25, right now, our plan looks as though that when we succeed at that. And that will, of course, drive '25 forward with vitiligo. Between now and then and inclusive of '25, the penetration of burns and soft tissue repair really drive our growth, and we'll be investing in the organization to be able to take advantage of that opportunity. So I think you have it just exactly right.

And our next question comes from Ryan Zimmerman from BTIG.

I want to ask about the domestic burn dynamics a little bit. It was really encouraging to see. I wonder if you can elaborate and maybe if Erin is on the call as well, just around the interest and usage of RECELL from a TBSA perspective this quarter, just given what we've seen with other players in the space who maybe had softer results. I'm just curious if you feel like you're taking some share from maybe some of the larger burn cases that are out there?

Well, Erin's not on the call, but I'll take the answer because I think I know. We didn't see a downtick in burns admissions during the quarter, and we did see the results of some other participants in the market. It's our assessment, therefore, that we are taking share in the PBSA in different categories within that how the burns are categorized. So the dynamic doesn't seem to have meaningfully changed from our view. So it has to be therefore a share gain.

Appreciate that color, Jim. And then as you think about the investments that you need to make in soft tissue in both the kind of the near and medium term, maybe you can elaborate a little bit more specifically on kind of given that it is 3x the opportunity. I don't know if that implies maybe 3x the field force, but be curious to get some color about how you're thinking about ramping that commercial strategy, be it feet on the street or just broader investments? And how we should be thinking about it from a modeling perspective?

Yes. It's a great question. I think that answer on a rather high level. I think in our February conference call, I'll be able to give it to you in some detail. But quite simply, the market overlaps in the following manner. Level 1 and 2 trauma centers are the soft tissue repair target. They overlap about 50% with our burn centers. So we'll have a need to invest in the organization that can reach those additional level 1 and 2 trauma centers. And we'll be doing that actually during the first half of next year ahead of the anticipated approval in June. So given that we have reimbursement already both inpatient DRG and also an outpatient, we intend to be in a position to take advantage of that reimbursement immediately in July of next year, pending that approval by FDA. So that is how we're thinking about it. We're in the midst of planning it right now. We're, in fact, finalizing our plans in the next 30 days and begin executing on that. So I think when we're on the February call, I'll have some further detail for you. Is that helpful?

[Operator Instructions] And our next question comes from Joshua Jennings from Cowen.

Jim and Michael, I was hoping to just ask about the data verification reanalysis of the both primary endpoint for the soft tissue trial. Just any other details you can share what catalyzed the reanalysis and the data verification process? Is this standard fair? And then any help just interpreting what the new statistical significant [indiscernible] result encompassed.

Sure. And actually, it's a great question. If you recall, our initial top line readout was really quite good on its own, notwithstanding it didn't meet the predetermined endpoint. We did what you do always in this type of study, which is to review the 100% review of the source endpoint data against the clinical database to make sure that when you submit, you have it right and subject to an FDA examination of the same data, you don't want to have any errors. During the process, 2 subjects were updated. One had a data entry error and 1 subject should have been excluded from the analysis as they had surgery to remove a medication implant that was right in the RECELL wound and interfered with the healing. So that is really just those 2 patients, and it was really part of the standard source endpoint data review.

No, that's helpful. And just thinking about the soft tissue opportunity in front of approval. I understand there is some off-label use. You now have data that supports the indication, but just not a regulatory approval. Any help just thinking about the level of off-label use for soft tissue indication currently? And when a publication could be made, that could caveat more off-label use even in the front of that July launch time frame that you've provided?

Yes. Really great question. So first of all, of course, we won't be promoting off-label during this time frame. One of the benefits, though, we get from an early preparation of the sales team is there are burns cases that show up in level 1 and 2 trauma centers that are not required to be treated in a burn center. So we'll start getting some benefit from that during I would estimate in Q2. And again, this is one of those things that I'll be updating you in the February conference call. But I think that we're going to be staying focused on getting prepared for that June expected approval and the launch in July that would follow. And in the meantime, we'll be training our organization, getting them ready. They'll have the opportunity in those other centers to pick up some additional sales from the burns that enter level 1 and level 2 trauma centers. So I think that's the best characterization I can come to at this moment.

Understood. And maybe one more sorry about this. But just thinking about off-label use, and you now have data set in stable vitiligo, there is a melanocyte keratinocyte transplant procedure that's being performed. I mean do you suspect that some derms will want to get their hands on a RECELL system and start performing melanocyte transplant procedures with the RECELL system in front of approval or even final reimbursement?

A couple of different questions, so I'll try and break it up. I don't have an expectation that we'll be promoting or placing RECELL in derm offices between now and approval. I don't anticipate that. We do anticipate some cash pay post approval, and we do anticipate supporting some clinical work, both investor initiated as well as some work we're going to so ourselves. So there will be activity in that respect. But not I don't think we'll be communicating a significant upward guidance as a consequence. So I think we'll see during the period before approval for soft tissue, physicians can choose to use RECELL for grafting need. But at the same time, it won't be a consequence of our promotion.

And our next question comes from Madeleine Williams from Wilsons.

I just wanted to check. So you've obviously, with retailing burns, you've obviously been able to build out a pretty successful sales force and generate pretty good productivity there. I'm not sure if this was mentioned, but just wanting to understand what your expectations are for the sales force going forward and then expanding that as soft tissue and potentially vitiligo down the line become commercial, understanding that I believe the sales force is around 30 at the moment.

Yes. Again, good question. I'll break it into a few pieces, if you don't mind. So the field force is around 30, which includes both field support for cases as well as direct salespeople. And so you're approximately right in that particular number. The opportunity in soft tissue is, as I mentioned, in the order of 3x larger than that with burns, both in call points, hospitals and market size. And so to really get after that, it's necessary to invest in a sales expansion that will at least cover the large volume centers throughout the United States, which we will be doing. And as I mentioned earlier, I'll characterize that, I think, in a little bit more detail in the call that we do in February, it's not Q1 call, actually that's end of year '22 call. I think you'll see that, that investment characterized at that time. And our current early thinking is that we would be having to those that investment become, so to speak, reality during the Q2 period, and we will provide some further guidance on that. Is that your question?

And I am showing no further questions. I would now like to turn the call back over to Jim Corbett, CEO, for closing remarks.

Well, thank you very much. We're really feeling very excited about the progress we made this quarter, and we're looking for further to our submissions for vitiligo and soft tissue here in December in the next month or so. So this is really setting the pace for our increased rate of growth that we expect in 2023 and '24, and I'm looking forward to sharing that with you in the February call. So thank you all for attending, and I look forward to speaking with you more at that time.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.